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While oil’s best quarter in a decade has ignited a rally in the oil market, some stocks haven’t caught on.

Oil prices are coming off their best quarter in a decade. The U.S. oil benchmark, West Texas Intermediate, has rebounded nearly 40% so far this year to around $65 a barrel. That rebound has fueled similar rallies in oil stocks, with several significantly outperforming crude prices.

Some oil stocks, however, have yet to latch on to the rally. Three notable laggards are ConocoPhillips(NYSE:COP), Anadarko Petroleum(NYSE:APC), and Concho Resources(NYSE:CXO). That underperformance suggests they still have ample upside even if crude prices level off from here.

Image source: Getty Images.

Running out of steam despite plenty of fuel

ConocoPhillips was the best-performing oil stock of 2018. The oil giant generated market-crushing total returns of 15.6% even though crude prices and the stock market tumbled during the fourth quarter. The company overcame those headwinds by producing a flood of cash flow thanks to its efforts to reduce costs and invest in high-return expansion projects. That enabled it to return boatloads of cash to investors via two dividend increases and a needle-moving repurchase program.

The oil company entered 2019 well positioned for lower oil prices. ConocoPhillips needs oil to average only $40 a barrel to fund its $6.1 billion capital budget, which is enough money to grow production by 7% this year. That sets the company up to generate free cash if oil is above that level. ConocoPhillips doesn't need that money since it had $4 billion in cash on its balance sheet at the end of last year, which is why it planned to repurchase another $3 billion in stock this year.

Crude prices have vastly outperformed the company's view this year since they're now in the mid-$60s. Because of that, ConocoPhillips is on track to pile more cash onto its balance sheet. Its stock price, however, doesn't yet reflect this -- shares are only up about 5% this year. That suggests the stock could have significant potential, especially as the company keeps buying back more shares.

Barely budging despite being on track for a gusher

Shares of Anadarko Petroleum have also significantly underperformed the price of oil this year, only gaining about 7%. That lackluster return comes even though the company is on track to produce lots of free cash. Like ConocoPhillips, Anadarko set its budget for lower oil prices. The company only needs oil to average $50 a barrel to give it the money to pay its dividend -- which it boosted 500% last year -- and fund a capital program that should grow oil production by 10% this year.

Because of that low oil price break-even level, Anadarko can generate increasing free cash at higher oil prices. At $60 a barrel, for example, the company could produce $1.6 billion of excess cash. That's a significant windfall for a company that already has about $4 billion in cash on its balance sheet. It sets the company up to repurchase even more stock than the $1.5 billion it plans to buy back through the middle of next year. Those share repurchases should help push Anadarko's stock price higher over the next few months.

Image source: Getty Images.

Not much movement even though it's cashing in

Concho Resources stock has also lagged the price of oil this year by only rising 7%. That meager gain comes even though the company entered the year on pace to grow its oil production 15% despite reducing capital spending 17% so that it could generate free cash flow at $50 oil. With oil prices rebounding, Concho's free cash is on track to surge. On top of that, the company recently cashed in on an oil infrastructure investment, which will bring in another cash windfall.

Because the company already has a strong balance sheet, Concho Resources is in position to return money to shareholders this year. The driller recently initiated a cash dividend. It could soon take the next step and follow its peers by authorizing a stock repurchase program. Add that potential catalyst to the company's fast-growing oil output and cash flow, and Concho's stock seems as if it has plenty of fuel to surge in the coming months.

The upside still abounds in the oil patch

Oil prices are up sharply this year, which has fed a big-time rally for most oil stocks. Some, however, have been slow to respond, led by ConocoPhillips, Concho Resources, and Anadarko Petroleum. All three look like they have significant upside potential since they're on track to produce a bonanza of excess cash, the bulk of which they could return to investors. Those dual catalysts could propel their stock prices over the next few months as long as oil prices hold up.

Author

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries: Follow @matthewdilallo